(Edited for Clarity)

Jay Knighton: This Jay

Enpo Tu: Good morning Jay this is Enpo calling on behalf of My Financial Coach.

Jay Knighton: Hi how’s it going?

Enpo Tu: It’s going well. Thank you very much and I’m glad to have an opportunity to reach you Jay and what I’d like to do is just give a little bit of background for our listeners on our call today. At My Financial Coach, we’re reaching out to some of our Subject Matter Experts to make sure that some of our listeners are able to get some of the wisdom that some of our Subject Matter Experts have and to address some of the concerns that they have surrounding money and some of the decisions that come with having a little bit of wealth. So one of the things that we are gonna address today is what happens when someone has a lot of wealth and then their children are faced with the dilemma that someone may be coming after them for that wealth in a very indirect way.

Enpo Tu: So let me set the background for you. Imagine that one of your clients comes to see you and says: “I think my kids are marrying someone that wants my money” and the scenario is that the guy comes to you in your office and says: “I’ve worked hard to give my family a great start in life. Recently, I feel that someone is taking advantage of one of my kids. I’ve seen my kid start wearing expensive clothes and drive around in something I don’t even have. How do I make sure my kids realize that not everyone likes them but rather likes their money” and before you address this question up why don’t you give a little bit of background about yourself and then give us a little bit more about what you think this scenario is all about.

Jay: Well, thank you for that and I appreciate you providing that information and setting that stage. Of course, my name’s Jay Knighton the owner of the law firm Knighton and Stone in the Woodlands, Texas for seventeen years all we’ve done over here is practice estate planning law and the tax aspects that coincide with the estate planning, wealth transfers, and mostly transaction-based law. So, I deal with this stuff on a daily basis and I’m board-certified, I’m one of the few attorneys in Texas that is board certified and have a master’s in law and tax all my background is based around wealth preservation and wealth transfer and I meet with clients with this exact concern. If it’s not every day than its every other day. So I appreciate you asking this question because I see it from my clients in the greater Houston Texas area. Many clients no matter where they live or where they move from the has the same concern. They worked very hard to accumulate assets and they wanna make sure that they’re being responsible and transferring those assets to the next generation typically.

Jay: So, with your scenario. Wealth transfer and how to responsibly do that. Are prepared documents that responsibly transfer that wealth when someone passes away. I really think of it as a four step approach when I’m meeting with clients and we will cover all four of those bases today. But the first thing that I do is not a legal matter.
I wanna find out how it engaged the clients are with their children regarding wealth management. Most of the clients, if it’s first-generation, almost all the clients but even if its second, third generation, wealth. They really had no coaching or instruction of how to chat with their children about managing assets and wealth preservation. So many people seem to leave that up to the children and explained to them what the clients have done is created a team of the attorneys, wealth managers, and the CPA. And that team can provide a lot of instruction and guidance to the children. If the clients are comfortable doing it. But I do encourage clients to chat with their children about. What.
good things they’ve done to make good financial decisions but also to share the bad things because the kids need to understand ”what can I do to replicate the success of what the parents have done?” But honestly the reason this question comes up is because the parents have had success in accumulating assets.

Jay: So the first thing I want to do is look at the resource materials and use their team to convey those concepts and that knowledge down to their kids so that the children are not having to start over from square one and they can piggyback off what the parents have. All the knowledge and wisdom the parents have accumulated over years of managing and growing wealth. So that is the first thing to do because we can’t really expect children to do a good job managing assets in the seven-plus figure range when they don’t have the skillset and knowledge to do it and they’re just expected to have learned it from some third party when the parents really are the best ones to convey that knowledge so that’s number one: work with the kids.

Jay: Working with the kids is great but there are three other things we want to cover but because the children may be great but centers of influence can be very destructive and manipulative. So one of the first things that I chat with clients about in the wealth transfer is being very private about what they own and privacy in estate planning comes in the form of it leaning more toward a revocable living trust for the estate plan rather than a will. The reason why there is a revocable living trust is the greatest and best is because there is a very powerful veil of privacy over assets. A revocable living trust doesn’t protect assets. But they create privacy because they really remove assets by transferring assets to the revocable living trusts you remove those assets from a lot of public record databases. Those databases come in the forms of real estate and what you bought what you paid for it, vehicle records there is a tremendous amount of information available to the public for free of what you own, what you paid for it, and how you’ve accumulated it. With the revocable living trust, you remove a lot of that information from this public record databases because people can’t figure out easily what you own due to the fact that you’ve created your alter ego or revocable living trusts to hold that title.

Jay: So, for children, if they have centers of influence which could come in the form of a spouse girlfriend or just friends. If someone is targeting the child to indirectly get to parents’ assets removing the parents’ assets for public record databases often will remove that child from the crosshairs of people that are targeting kids to get to the parents so privacy is a big deal. The living trust also contains a very private estate plan so there’s no public record when parents pass away. This is extremely helpful for the children when it comes to them and inheriting assets because people can’t easily figure out what they inherited or how they inherited it do the fact that the plan is in the very private revocable living trust. That’s thing number two.

Jay: Thing number three that we look at is within the revocable living trust. So within the estate plan itself. Making sure we prepare provisions. and craft provisions so that the children inherit in a trust that springs into effect for the child when the parents pass away. If parents want to if or desire to give access to the children while the parents are alive using a trust to receive and hold those gifts is very important because that kind of trust in virtually all fifty states, if you inherit in the trust from your parents assets in that trusts, are protected from creditor claims and even divorces. So creditor claims can come in the form of a targeted child that is targeted from someone. Who has a lot of debt and just poor money management techniques and skills and that person creates a lot of debt during the marriage. Well, inherited trust assets aren’t going to be subject to that debt. That debt cannot reach through the trust walls of protection. In that type of trust if you recall with a revocable living trust there is no asset protection, generally, you do not receive asset protection if you take your assets and put in a trust for yourself. But when someone passes away such as the parent, transfers assets to the trust for somebody else such as a child, tremendous asset protection laws attach to the inherited assets to protect those assets from creditors and even in divorce situations. So using a trust for the children is very important for that trust for the children to spring into effect has been what I used to paint a picture of this trust coming into effect at some point in the future when parents pass away and children inherit in that trust to protect their assets. Furthermore, that trust not only provides an asset protection feature. Most clients with parents that come to me with a higher network they desire for those assets to remain in the bloodlines not transfer out to in-laws who have a tendency to remarry or may have their own set of children. So those type of trusts keeps assets in the family structure such that when a child passes away far into the future. The trust itself dictates where the assets remain in the trust and where those assets transfer is typically to client’s grandchildren. So trusts that we create within an estate plan keep assets in the family and protect assets and they lead me into the fourth aspect that we’re going to cover with clients which I call responsibility.

Jay: Those trusts can be built-in with features that create a very high level of responsibility for that child who’s the beneficiary so that child learns those asset management and preservation techniques even after their parents have passed away. Responsibility comes in many forms. Typically it begins with the parents naming a trusted person to manage the assets in the trust. That person’s known as the trustee. The trustees gonna make two kinds of decisions: they make investment decisions. They make distribution decisions for the beneficiary so there’s a myriad of different kinds of trustees you can select many clients favor individuals. There are professional businesses corporate trustees and we know corporate trustees that have been in business for over a hundred years and their sole job is to manage trust assets for the children. Yes, they do charge a fee but I’d rather clients pay fifty basis points or a trustee to manage assets to make wise investment distribution decisions than a child who’s not ready to serve in that role lose all the money and effectively pay a hundred percent in a complete loss of the but due to poor decision making. So with the responsibility as a factor, we look at naming trusted advisors to make wise decisions and take action when they need to and using those to serve as trustee and then ease the children into the role of serving as a trustee at some point the future what’s wildly popular with clients is to
requires that child to serve as trustee or a co-trustee for a period of time. So as co-trustee they aren’t making all the decisions but they got a seat at the table. They must meet with the wealth management group and understand diversification and why we don’t put all of our assets in a speculative investment because their buddies are suggesting or their spouses or in-laws could buy into the project and use their money to fund it. So the co-trustee they’re going to these meetings they can bring these ideas up and they have a committee or group that is there to provide that guidance and gently correct missteps or avoid missteps.

Jay: By easing them into that role they are also meeting with the CPA to understand how income taxes effective investments and they’ve got to go to those meetings and participate in those meetings and then after a period of time which is many clients like a five to seven-year window then that child has the skill set to serve as trustee. Without the need of that committee approach for corporate trustee approach. So we’re teaching the children responsibility with the trust even after the parents have passed away. So that child can manage those assets and the point I make to clients is if the child’s not trustee they don’t have to walk through fire use assets. They just have to go to the trustee and justify the reason that they needed the distribution from the trust so that the trust itself can have very flexible distribution provisions such as distributions for health and education and maintain lifestyle. That maintaining lifestyle is not elevating lifestyle for an in-law or in-law’s family. It’s maintaining the lifestyle that beneficiaries accustomed to. And clients can even tailor those distribution provisions to distribute income, for example, utilize productivity incentives and there is a lot of things clients can do within a trust to transition that wealth responsibly to the next generation. So the responsibility is that fourth factor.

Jay: So to recap, when clients come to us with that question we’re first and foremost focusing on how do we address the issue itself and provide that child with the tools to make wise decisions going forward regarding assets. Next, we’re looking at creating a high level of privacy so that hangers-on for that child just can’t figure out what the parents own They really don’t have hard facts to establish that this child is going to inherit a bunch of stuff so let’s target that person. Number three we’re looking at creating an estate plan or a trust for that child that springs into effect when the parents pass away because the trust can create guidelines that an outright transfer just will never be able to accomplish for us such as protecting assets and ensuring assets remain in the family. And then number four we are looking at responsibility. If we need to create levels of responsibility to ease that child into managing and controlling the inherited assets. So those are the four things we look at.

Enpo: Well thank you very much for that very thorough analysis Jay. I’m glad that we’re able to review this and one of the things that were always happy to do is to highlight some of the things that that you shared with us today and thank you very much. Are there any other things that you feel that you would like to address for this question?

Jay: Well which is that team approach that I mentioned. Drafting all this is great but if the CPA and the financial planner are not on board with updating beneficiary designations and coordinating account titles all of the great planning that you drafted in the estate planning can unravel completely so once you come up with a plan with your counselor then coordinating that team approach to coordinate all these moving pieces so that all the funds flow into that trust everyone knows what to expect that’s the last step that’s so crucial in the overall planning process so if I added a fifth thing it would be coordinating among the professionals to make sure we follow this plan when the parents pass. Thank you so much if somebody can benefit from that I hope it’s helpful and if I can do anything else for you, let me know.

Enpo: All right thank you very much Jay.

Jay: You’re welcome.